This year has been a roller coaster ride for cement manufacturers. While most manufacturers posted stellar results in H1FY20, the coming quarters might see a sequential drop in their performances, thanks to the cement prices falling from their peaks.
In the first half of the year, companies enjoyed cost savings on account of consolidation in the industry. This got a further fillip from soaring industry-wide realisations, thus, leading to decade-high EBITDA per tonne for many.
After two successive years of lull in cement prices, January 2019 showed signs of uptick. This was thanks to the Centre’s continuing thrust on the infrastructure and construction space, translating into effective policies. With significant push in the affordable housing segment, the South and the West regions saw 15 per cent and 8 per cent (sequential) rise, respectively, in cement prices in February.
In the election months (March to May) that followed, cement manufacturers lowered their production volumes, keeping in mind the prevailing code of conduct and subsequent monsoon. Compared with the monthly average growth rate of 13 per cent (YoY), cement production saw a meagre growth of 2 per cent and 3 per cent in April and May 2019, respectively.
The short supply thus helped the price rally persist till mid-June, despite the visible slowdown in award of construction contracts.
The all-India average price of a 50-kg bag of cement moved 9 per cent in the quarter ended June 2019 to ₹360.
In the subsequent months, the price witnessed a gradual drop, with it factoring in the almost evident economic slowdown. Besides, floods in most parts of the country worsened the demand scenario to lower-than-expected levels. Though the production volumes also dropped 5 per cent and 2 per cent in August and September, respectively, it didn’t help the prices much.
Consequently, the all-India average price saw a 6 per cent sequential drop in the September quarter. The South region saw the steepest fall — 11 per cent from June quarter price levels. Based on a channel check report of JM Financials, cement prices don’t seem to have revived in October as well — the all-India average price dropped 2 per cent from September quarter levels.
That said, what do the coming months have in store for cement prices?
Weak demand
The infrastructure and construction industry — the demand-driver for cement — got hit by the mounting NPA crisis of PSU banks first in beginning 2015. Then came the liquidity crunch in 2018 that worsened the debt woes of companies in this space. By the time the Centre attempted to open the clogs in funding avenues in 2019, demand had begun witnessing a slowdown.
While data from the National Highways Authority of India (NHAI) reveal a slowdown in fresh awarding, the Centre’s data on CPSE (Central public sector enterprise) projects reveal prolonged delays on existing projects as well. In state-funded infrastructure projects, inadequate budgetary support and prolonged delays in land acquisition-related suits crippled the progress. In the case of realty and affordable housing projects, the falling income and credit levels also played the villain in weakening the demand further.
The construction and infrastructure space thus continue to crawl. In Andhra Pradesh and Maharashtra, political paralysis has made matters worse. The continuing tussle in Andhra Pradesh over the Amravati capital region has brought several State-run infrastructure and (private) realty projects to a standstill.
The road ahead
According to the report by JM Financial, cement prices in October 2019 declined 4.5 per cent in the Western region over September quarter (average) levels. In the North and Central regions, however, prices seemed to have remained flat. The apex court’s verdict to pass on the construction of several stalled units to state-led NBCC could be one major contributors for continuing demand in these regions.
Prices in the West could remain volatile for quite some time. This is because, one, funding for stalled housing projects is likely to benefit Maharashtra the most. Two, the likelihood of a presidential rule in the State might make situations akin to that of Andhra Pradesh and Telangana.
In a report by ANAROCK property consultants, the top seven cities in the country alone have over 19 lakh under-construction houses. Of these, Mumbai and Delhi together comprise 60 per cent, while Pune has 19 per cent. Thus, cement prices are expected to see an uptick in the West and the North regions. For South the problems of sand mining and political paralysis continue to remain, leaving the revival in demand questionable.
On a pan-India level, the picture might continue to look gloomy. While many cement companies were betting their future on healthy monsoon and the subsequent rise in rural demand, an abysmal level of rural CPI (consumer price index) casts doubts on the spending power of dwellers of Bharat. We expect the rural demand to remain muted on the back of weakening core CPI in rural areas and consequent drop in rural incomes.